On October 1, the Senate Finance Committee held a hearing on how crypto assets should be taxed. Senators from both parties acknowledged that crafting tax rules for digital assets will be a complicated undertaking.

Based on testimony and questions from committee members at the hearing, a key issue that has yet to be resolved is what to do about small crypto transactions. Witnesses at the hearing argued that some kind of de minimis rule for small crypto transactions is necessary. Committee members questioned that, though. It was clear from the hearing interactions that determining what a “small transaction” is could be a fraught issue.

Some Senators warned that a de minimis exemption for small crypto transactions could lead to criminal activity or amount to a subsidy for the crypto industry. Industry representatives argued that a de minimis exemption is crucial to avoid burdensome reporting and recordkeeping.

The crypto industry testified that there must be an exception for tax liability on such small transactions as “buying a cup of coffee or the fees associated with larger transactions.” Tax liability on such transactions, they said, would discourage use of digital currencies.

“You’re going to have billions of transactions that taxpayers are going to have to report, keep track of” unless there is a de minimis rule testified Jason Somernsalto, director of policy at Coin Center. “I don’t think most taxpayers are prepared for that result.”

There is currently pending a bill, S.2207, introduced by Sen. Cynthia Lummis (R-WY) that would provide a de minimis exemption of $300 per transaction up to an overall cap of $5,000 per year.

The complications of the effort include more than just the de minimis exemption issue. Also triggering considerable discussion at the hearing was the issue of staking (the process by which crypto holders lock up tokens to validate transactions on the blockchain). There is bipartisan interest in taxing the rewards from staking at the point of sale rather than treating them as gross income (the current rule). “Current rules and limitations for grant or trust do not contemplate novel concepts such as the staking of digital assets, leaving many taxpayers relying solely on advice from well-meaning accountants as to whether these tax structures are viable investment vehicles,” said Sen. Steve Daines (R-MT).

Prospects: There is considerable bipartisan and bicameral interest in the effort to establish tax rules specific to crypto transactions. The House Ways and Means Subcommittee held a similar hearing in July. In the Finance Committee, Sen. Daines said he is working on a comprehensive package of crypto tax rules. He said his work would complement the work Sen. Lummis is doing on the issue in the Senate Banking Committee. In the Ways and Means Oversight Committee, both Rep. Max Miller (R-OH), and separately, Rep. Steven Horsford (D-NV) said they were working on bills. It is not clear whether the Republican and Democratic members working in this area will join in one bill, however, making it unlikely that a bill like this could move on its own or very quickly in the next few months.

NAIFA Staff Contacts: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.